If the government begins to run a larger budget deficits, then assuming there is no Ricardo-Barro effect, the demand for loanable funds ________ and the real interest rate ________.
A) decreases; falls
B) decreases; rises
C) increases; rises
D) increases; falls

Question

Quizplus · Accepted Answer

When the government runs larger budget deficits, it borrows more, increasing the demand for loanable funds. This increased demand typically leads to higher real interest rates.

If the Government Begins to Run a Larger Budget Deficits